Eoin Treacy's view Veteran subscribers will be familiar with Fullermoney's long held belief in the importance of banking sectors as a measure of the health or otherwise of bull markets. There are a number of reasons for this but chief among them is that a bull market thrives on liquidity. Therefore, as liquidity providers banks should perform at least in line with the wider market. Additionally, when banks occupy a high weighting in their respective indices their performance is obviously even more influential.

As liquidity providers banks are sensitive to changes in the monetary environment such as the cost, quantity and availability of money. For this reason they are also often leaders as a new bullish cycle emerges. As the benefits of additional liquidity provision filter down to other sectors, banks will often perform more in line with the wider market rather than outperform. However, when they are clearly trending lower, particularly if the wider market is still rallying, it is a clear indication that the animating factors that helped drive the bull trend have changed.

At present the return to outperformance of banking sectors in China and Japan is particularly relevant and is supportive of the medium-term bullish outlook not least because these markets are rallying from such depressed levels. The USA, UK and Europe offer a somewhat different example because their respective markets have been rallying rather impressively over the last few years while their banks have had to deal with one scandal after another coupled with non trivial solvency issues. The quantitative easing that has been such a feature of the monetary environment globally was necessary to avoid the collapse of these banks. The Western financial sector represented the epicentre of global risk prior to the credit crisis and their convalescence has understandably been lengthy.

I thought that since we have had such positive activity in banking sectors globally over the last month that a review of their relative performance would be timely.

In the USA, the S&P Diversified Financials Index found support in the region of the 2008 lows from late 2011 when compared to the S&P500. The ratio has held a progression of higher reaction lows since July and has broken the medium-term progression of lower rally highs. The S&P500 Banks and KBW Regional Banks ratios have been more rangebound but they both rallied to break short-term progressions of lower rally highs in December and will need to hold above their recent lows if the benefit of the doubt is to be given to outperformance.

In Europe both the STOXX600 Banks Index and the Euro STOXX Banks Index ratios trended consistently lower between August 2009 and July 2012. They have both rallied to break medium-term progressions of lower rally highs and sustained moves below their respective November lows would be required to question medium-term scope for additional medium-term outperformance.

The UK's FTSE-350 Banks Index ratio shares a similar pattern with the S&P500 Diversified Financials ratio but has outperformed even more emphatically since November.

The Swiss Banks Index fell even more than the above ratios when compared to its 2009 lows. It found medium-term support in July and the ratio has held a progression of higher reaction lows since. These would need to be broken to question scope for additional outperformance.

The Topix Banks Index ratio trended lower between 2005 and June 2011. It has developed a rounding characteristic consistent with accumulation over the last 18 months and a break in the progression of higher reaction lows would be required to question additional potential for banking sector outperformance.

As the largest sector in the Chinese market, banks represent an important constituent in the wider Index's performance. The FTSE A600 Banks Index found support in 2011 following a period of extreme underperformance and has held a progression of higher major reaction lows since. The ratio rallied to post a new 5-year high this week and while overbought in the short term, a break in the progression of higher reaction lows would be required to question medium-term potential for continued outperformance. The CSI300 Financial ratio, which also includes insurance companies, has a similar pattern of outperformance.

The Hong Kong Hang Seng Financials ratio broke out of an 18-month base this week suggesting a return to medium-term outperformance.

Singapore's Financials Index has been outperforming the wider market by a considerable margin for more than a year and the STI has now begun to respond which will probably lead to a period of mild underperformance by the banks.

The Bombay Index has been leading the wider market higher since 2009 and the ratio continues to trend consistently. A sustained move below 1.8 would be required to question medium-term potential for further outperformance.

As the Yen's weakness takes its toll on South Korea's export sector, the Kospi has fallen rather sharply. The response of the central bank is likely to be to weaken the Won and the financial sector is responding positively. The ratio had been trending lower for over five years but rallied over the last couple of weeks to break the medium-term progression of lower rally highs to suggest a return to financial sector outperformance.

The Taiwanese, Indonesia, Thai and Malaysian ratios are mostly rangebound indicating the banking sector is performing more or less in line with the wider market. The Turkish ratio is also mostly rangebound but has exhibited an upward bias more recently.

The S&P/ASX Financials Index outperformed the wider market from mid-2011 but the ratio has been ranging in the region of the upper side of the 5-year base since July. It found support earlier this month and medium-term potential for further outperformance appears more likely than not. The S&P/ASX 200 Banks Accumulation ratio posted an even more impressive outperformance from the 2009 lows and shares a similar pattern over the last six months.

The S&P/TSX Financials Index returned to a position of outperformance from September and a sustained move below 0.14 would be required to question medium-term upside potential.

The FTSE/JSE Financials Index has been mostly rangebound over the last few years but has exhibited an upward bias over the last few months.

In conclusion while sentiment towards banking sectors in the West is moribund, the commonality in outperformance globally suggests that the liquidity fuelled environment investors have been presented with over the last few years remains a tailwind for the sector. Perhaps most notable is the fact that of all the ratios reviewed above, none are still in clear downtrends. This is something we could not have said until the middle of last year when the Eurozone's crisis passed its nadir. Despite short-term overbought conditions on a number of stock markets, the medium-term tailwind from the financial sector remains positive.